01 February 2024

On today’s episode, Clay and Kyle give an overview of their best quality stock idea for Q1 2024. This quarter, they discuss Evolution AB.

Evolution AB is well-known in the world of quality investors. The stock has compounded by over 60% per year over the past 5 years and seems to have a long runway for growth ahead. Clay and Kyle give an overview of why they own the stock and why they like the company’s long-term prospects.

Disclaimer: At the time of recording, Clay and Kyle both own shares in Evolution AB.

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  • Resources Kyle found most helpful in initially researching Evolution AB.
  • What Evolution’s business model is and how they make money.
  • How the quantitative metrics look for Evolution.
  • The massive tailwinds at play in their industry.
  • The difference between a regulated and unregulated market.
  • What geographies Evolution has the largest presence in.
  • What the competitive landscape looks like.
  • How Evolution has been able to continue growing and withstand competition despite the high returns they’ve achieved for many years.
  • An overview of Evolution’s management team and recent acquisitions.
  • How Kyle thinks about the valuation.
  • The most important KPIs to track for Evolution.


Disclaimer: The transcript that follows has been generated using artificial intelligence. We strive to be as accurate as possible, but minor errors and slightly off timestamps may be present due to platform differences.

[00:00:00] Clay Finck: On today’s episode, I’m joined by my co-host, Kyle Grieve, to kick off a new series titled Best Quality Ideas, where we discuss a quality Stock We Like for this quarter. To kick off this series, we’ll be covering evolution AB Evolution develops live casino games, which are played all around the globe.

[00:00:17] Clay Finck: What I personally like about evolution is that they’re really capitalizing on this trend from land-based casinos to online casinos. As more and more markets establish a regulatory framework, evolution is well-known in the world of quality investors as the stock has compounded by over 60% per year over the past five years, and it seems to still have a long runway for growth ahead.

[00:00:40] Clay Finck: In this episode, Kyle and I cover what Evolution’s business model is and how they make money. How the quantitative metrics look for evolution. Historically, the massive tailwinds at play in their industry, the difference between a regulated and unregulated market. What geographies evolution has the largest presence in the competitive landscape and evolution’s moat, an overview of evolution’s management team, and recent acquisitions, the valuation and the most important KPIs for investors to track and so much more.

[00:01:08] Clay Finck: Before we dive in, I’ve had many people reach out to me about the events. TIP is hosting during the weekend of the Berkshire Hathaway meeting in Omaha, we’ll be hosting live social events for members of our TIP Mastermind community, which is a paid group our most passionate audience members are a part of, and we’re also hosting a more private exclusive event known as the Berkshire Summit.

[00:01:28] Clay Finck: The Berkshire Summit is a rare opportunity to spend an evening with me, William Green in an amazing group of elite all-star investors, some of which have been very popular. Guests on the Richer Wiser Happier podcast. We only have a few more spots left for the summit, and you can learn more by staying until the end of this episode where I’m going to go into more detail or simply clicking the link in the show notes.

[00:01:50] Clay Finck: With that, I bring you today’s episode with Kyle Grieve on Evolution AB.

[00:01:58] Intro: You are listening to The Investor’s Podcast. Since 2014, we studied the financial markets and read the books that influenced self-made billionaires the most. We keep you informed and prepared for the unexpected. Now for your hosts, Clay Finck and Kyle Grieve,

[00:02:23] Clay Finck: Welcome to The Investor’s Podcast. I’m your host, Clay Finck, and today is a great day ’cause we have the start of a new series teed up for the listeners. As I’m joined by my co-host, Kyle Grieve. Kyle, how are you doing today? 

[00:02:36] Kyle Grieve: I’m doing great. Thank you for asking.

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[00:02:38] Clay Finck: So today we’re gonna be starting what we’re calling our best quality idea series.

[00:02:44] Clay Finck: It’s very exciting. This is where Kyle and I are gonna be talking about a stock that we believe is a quality name and hopefully is trading at a fair price, but sometimes that can be difficult to find depending on market conditions and the companies that we’re looking at on our watch list and such, and whatever’s in our portfolios.

[00:03:00] Clay Finck: So in this episode we’re going to be talking about Evolution AB, which is a company based out of Sweden and for anyone that’s in the circles that Kyle and I venture in on Twitter and such. You may be familiar with this name and I’m sure many other listeners might not be as familiar and that’s absolutely okay too.

[00:03:18] Clay Finck: I think you’ll find this company quite interesting. And this episode is going to be similar to the previous conversation Kyle and I had on the show where we discussed Dino Polska. We will be sure to get that conversation linked in the show notes. That was episode 5 87 on the podcast feed. And before we get started, I think it’s important to mention that Kyle and I both own shares in Evolution AB.

[00:03:40] Clay Finck: We’re gonna be referring to this as evolution. During this conversation, I acquired my shares in 2023, around an average price of 1000 to 84 Swedish Kronor. At the time of the recording, shares are treating around 1,210 Swedish Kronor, so slightly above the price I got in. And for those who aren’t familiar with the Swedish Kronor, it’s about a 10 to one currency conversion, one U.S dollars around 10.4 Swedish Kronor.

[00:04:08] Clay Finck: So you just divide any Swedish Kronor number by 10 to get a rough estimate of U.S dollars. And we have a rule here at TIP where we can’t buy or sell shares for two weeks after the episode’s release. And similar to Dino, I don’t plan to sell any shares hopefully over the next five plus years unless my investment thesis gets busted.

[00:04:27] Clay Finck: I plan to hold this stock for the long run, essentially. So Kyle, would you mind confirming that you also own shares and your average price if you happen to have that pulled up? 

[00:04:37] Kyle Grieve: Absolutely. So yeah I do own shares. I bought my first shares, I believe in July of 2022. So my average cost basis is 85 USD. So I have the A DR, the ticker ev VTY, and this comes to around the 900 SEK.

[00:04:54] Clay Finck: And of course, as with all stocks we talk about on the show. And none of this is intended to be a buy or sell recommendation. And certainly when it comes to evolution, Kyle and I have a bias because we own shares. So please do your own research. And even if you’re not interested in this type of company, I think it’s super helpful just to tune into how people think about companies, what do they look for, what are some of the things they like?

[00:05:17] Clay Finck: So I think a lot of listeners just really enjoy that as well. So the first question I had for you, Kyle, was how about we talk about how you discovered evolution in the first place? Because it’s based outta Sweden not a market that a lot of people are familiar with. And what did the research process look like after you discovered it?

[00:05:37] Kyle Grieve: So going back, I think the very first time I ever saw was just people mentioning it based off of looking at Chris Mayer’s filings and seeing that he owned it. And so then I started digging into it and looking just at the numbers and they were very outstanding. So I reached out to some people.

[00:05:53] Kyle Grieve: I reached out to Chris ’cause I DM Chris quite often and he’s obviously a pretty big friend of the show as well. And he told me a lot about it. He helped me a lot with questions I had. And then another friend of the show, Compounding Quality also. He’s a huge fan, and I think he’s an owner as well. So I DMed him and conversed with him a ton and asked him again the same types of questions, trying to figure out how they’re modeling their, what it’s valuation, and trying to find out more about the mode and any type of interesting tidbits of information I could.

[00:06:21] Kyle Grieve: And then, yeah, so basically once I found it, there was also tons of other really interesting people on Twitter who were talking about it, and I reached out to them also in dms. A lot of these people that you don’t think Will, would talk to you. They will, because everyone wants to talk about their stocks that they own and share, because it’s good.

[00:06:37] Kyle Grieve: It helps you sharpen your own skills. 

[00:06:39] Clay Finck: And then how about the research process from there? What were some of the key sort of resources to figuring out the company’s business model and really understand how evolution fits into the big picture? 

[00:06:54] Kyle Grieve: A couple of the key resources that I liked.

[00:06:56] Kyle Grieve: So there was, I know in the US I, I can’t recall the exact name of it, but they publicize like all of their gambling regulations, like there’s boards and stuff like that. And so you can get really detailed information like specific to states, specific to the whole country. So that was really helpful ’cause I did do, I wrote a report for my sub-stock, which unfortunately doesn’t exist anymore about their total available market in the US and in Asia looking specifically.

[00:07:21] Kyle Grieve: And yeah, you could get really good data for the us like I think they do it like on a monthly basis, like especially New Jersey, just, they’re really ahead of the game. You can see what’s going on there and it’s growing at very high rates like all the time. So that’s one really good resource.

[00:07:36] Kyle Grieve: Another resource I used was just looking at other analysts. I generally like smaller businesses that have minimal analysts, but this is a business that is it’s the biggest one by far, by market cap in my portfolio. So there are other analysts and there are some other analysts doing some actually pretty good work.

[00:07:51] Kyle Grieve: I, you can look, use them to look at information about competitors, trying to find competitors, try to find out what competitors are doing, looking at the numbers and profit margins and the modes of competitors. So that’s another really good resource for finding out more. And then evolution and it seems like a lot of just Swedish companies in general have really good disclosure.

[00:08:12] Kyle Grieve: So if you just look on their website they have so much good information and they do a really good job of telling you what the business does, how it runs. And we’ll get into that later in more detail. So I won’t go into that now, but it’s really impressive. So if you wanna know more information about the company, you can just head straight to the source and look at the company documentation.

[00:08:29] Kyle Grieve: They have a lot of really good things there. 

[00:08:32] Clay Finck: I think you make some really great points there where the company has really good disclosures and there’s also really good data that you find from other resources. I think one of the things that stands out to me with evolution is, yeah, the New Jersey research sort of points to this market is a growing market.

[00:08:47] Clay Finck: And I think you find that, especially with what you pointed out in the article, you wrote up on their total addressable market. Just this market is global and it is growing and it’s providing a lot of tailwinds for evolution. So I think the next place to go here is what the heck does evolution do? 

[00:09:04] Kyle Grieve: Yeah, absolutely.

[00:09:05] Kyle Grieve: So evolution when people think about casino stocks. Evolution is not really, doesn’t really fit into that because it’s not a traditional casino. They don’t need to have these gigantic buildings that cost a lot of money and own all these and deal with regulators. They do have to in their own way, but luckily they have all these sorts of little shortcuts that make the businesses a better model.

[00:09:26] Kyle Grieve: So basically what they do is they create, operate, and run online casino games. So I like to think of it in a couple different ways. They have RNG, which is just, is random number generator. So that’s just like slots basically. If you imagine yourself in a physical casino and there’s just people.

[00:09:43] Kyle Grieve: Putting a lever down or hitting a button on a screen and then just a bunch of numbers generated on a screen. That’s what RNG is. I personally don’t find that part interesting, but a lot of people do and they make a little bit of money from that, but it’s not, definitely not their main segment.

[00:09:56] Kyle Grieve: So online live is actually their main segment, and I like to think of it as two segments. So one is online live. Like you would think of it in a normal casino. So roulette, blackjack, games like that where you go, there’s a dealer and there’s people standing around the table or sitting and having a good time or not having a good time.

[00:10:15] Kyle Grieve: And then, so they basically have these giant studios where they all basically record one dealer working with a whole bunch of people. And then they’ve they’re very innovative companies. So one of their biggest innovations is now these game shows. So these game shows their biggest, most popular one is called Crazy Time.

[00:10:33] Kyle Grieve: And you have a game show host and there’s a lot of stuff going on. Honestly I’ve watched some of the videos and I would probably just need to play it to actually understand the rules of the game, but it looks like the people playing are having a lot of fun and the hosts are always really well engaged.

[00:10:48] Kyle Grieve: And yeah. So basically those are their general, the way they operate. And yeah. So like I was talking about with these studios, you can think of a studio almost like a movie studio. I think that’s probably where they came up with the idea. So in Europe they have a whole bunch of these studios.

[00:11:04] Kyle Grieve: And the thing that’s interesting in Europe specifically is that they can have one studio, I think they have their biggest one is in Riga, which is in multi, I believe. And that one studio can have hosting games like all over Europe, and I know also in parts in Asia as well. So that makes things really easy.

[00:11:23] Kyle Grieve: And then when you, but when you compare that to North America, things change. So in the US especially, the studio has to be in the state where the users are playing the game. So basically what that means is they’ve had to partner up with. Casinos specifically in the US and then they basically reserve a part of the casino for their studios and that allows the regulators to come in and make sure everything is running as it should be.

[00:11:46] Kyle Grieve: But the economics it changed a little bit. ’cause if you can have one, one centralized studio blasting out video to multiple countries, that’s gonna be a lot better in terms of margins and scale than having to do it in each location. But it’s working really well for evolution. 

[00:12:01] Clay Finck: The live casino is really important to understand about this business where you’re getting online and you’re seeing a dealer.

[00:12:08] Clay Finck: I always think of blackjack ’cause it’s a game I personally enjoy playing, but there’s so many types of games over the years they’ve developed so many games. I believe it was 2023, they developed over 105 plus years ago, they were developing something like less than 20 or less than 10. So they’ve really scaled up the number of games they’re releasing that leads to users joining one game and then finding another game.

[00:12:31] Clay Finck: And there’s a lot of intersection that goes in with this. And I think the major sort of theme to understand with this business is the shift from physical in person. To digital. So we’re gonna be talking about this shift throughout the episode, but I think that’s the key theme, playing out here where these land-based casinos, their businesses are really stagnating, not really growing at all.

[00:12:54] Clay Finck: Most of ’em probably are in the decline, but this online portion is really something that’s growing. And evolution in the live casino aspect is what they’re really the big leader in and where their dominant position is at. And I think another interesting aspect of this is you’re getting online and you’re playing blackjack or whatever game, and you see a person right there.

[00:13:16] Clay Finck: It’s not like the random number generator games where you’re just clicking a button and it’s just telling you if you want or lost or not. You’re seeing a person and there’s some sort of interaction that’s happening there. Absolutely. Yeah. 

[00:13:29] Kyle Grieve: And I think that there’s a degree of trust when you have the actual dealer there.

[00:13:33] Kyle Grieve: And that’s like a big area of their game that they’ve tried to develop is that degree of trust with their customers. And I know it’s been hard because things happen, right? Like I, I remember Todd house, Helter talking when we talk about him talking about balls falling off the table or dropping a card on the ground and they have all their own little standard operating procedures for dealing with this and making sure that people aren’t cheating or people aren’t accusing them of cheating, and they are accused of them.

[00:14:00] Kyle Grieve: Any casino unfortunately gets that. But yeah they’re doing everything right in the eyes of regulators 

[00:14:06] Clay Finck: in the, as with many digital new age economy businesses, the economics can be quite attractive, especially when they’re strong moats at place. Talk about the economics of evolution and how exactly they make money then.

[00:14:20] Kyle Grieve: Essentially, you could think of it somehow that they’re a middleman. So obviously there’s a casino operator, so a casino operator that a lot of people would probably know would be like triple A casinos or poker stars. So they’ll have, let’s say someone goes on and wants to play one of their game show games, so they’ll go on.

[00:14:36] Kyle Grieve: Play a game show game, they’ll win or lose money, whatever. And then, so basically the money that they lose to the house goes to the house, which would be, in this case, let’s say AAA Casinos. And then AAA casinos basically would pay out, they basically have a variable fee and a fixed fee. So the variable fee will be a percentage of the gross gaming revenue, which is just GGR.

[00:14:55] Kyle Grieve: And then they have a fixed fee, which is just based on whatever the deal is that they have with evolution. And Evolution also has some of the interesting things that they do. So they have games where it’ll be branded as evolution’s game or as one of their subsidiaries. But then they also offer the ability to have branding of the operator.

[00:15:11] Kyle Grieve: It might be a game that’s hosted by Evolution, but the dealers and the game boards they’re playing all have AAA poker on it. So that’s an interesting little way, extra way for them to make money and make it so that it’s branded specifically for whoever the operator is. Yeah.

[00:15:25] Kyle Grieve: And that’s basically it. So they just get a upper, a fixed fee and a percentage of the gross gaming revenue, and they just basically make sure that their games are all running in, in Tip-top condition. And as long as. As that’s happening, and as long as people are enjoying their games and they can just keep on going.

[00:15:40] Kyle Grieve: And then an additional thing that Clay actually already mentioned was how they have multiple games, right? So some smaller operators might only have one or two games, so that’s, and that’s great. Maybe they have one or two games. But Evolution has this thing called one-Stop Shop, where essentially you can go and it integrates all sorts of different games into one application that the operator can then use and show to their players.

[00:16:00] Kyle Grieve: So that it’s really cool because it, it allows people to not only stay on their platform. But it also allows people to stay on Evolution’s platform and get used to more and more with their games and try out different things. And, yeah. So like you were also talking about with entertainment, I was talking to Data ASA and he actually said that he calls it Uncertainty Entertainment.

[00:16:19] Kyle Grieve: And I really like that. And it is like you can think of Netflix is is somewhat like that. It is certain in that you’re just watching a movie. But sports betting, that’s definitely uncertainty or betting on horses and then cards and all sorts.

[00:16:33] Kyle Grieve: There’s all sorts of things. So yeah, it’s a big market that they’re trying to penetrate, but they’re doing a really good job of 

[00:16:38] Clay Finck: it so far. You recently did a presentation with our mastermind community that discussed your portfolio, how your portfolio performed throughout 2023, and you talked about how you split your portfolio up into what you call stalwarts and then the nano or micro caps, your portfolio had a return of 18.6% in 2023.

[00:16:59] Clay Finck: So pretty good year for you. And that’s despite evolution being your largest position. And it’s been a choppy year for evolution, but the business results have been quite good. I think you and I would agree on, and for your stalwarts in your portfolio, you seem to have, for most of them, you have some quantitative metrics that you want to hit.

[00:17:18] Clay Finck: Just things like return on invested capital revenue and earnings growth along a track record of being a successful business. But then for your nano caps or your micro caps. These tend to not screen well. And they, from a quantitative perspective, they tend to look much different.

[00:17:34] Clay Finck: They’re on the cusp of an inflection point. Maybe they’re just becoming profitable or just they just became profitable. And these typically are misunderstood by the market. So it’s a, just a different way to invest really, where you’re looking for something that’s undervalued and trying to take advantage of that.

[00:17:51] Clay Finck: So how about you paint a picture of what you’re seeing quantitatively for evolution to help the listeners get a sense of the quality of this business? First 

[00:18:01] Kyle Grieve: thing I really love to see in any business I own is high insider ownership, right? Because you want people managing the money who are hopefully aligned with you as a shareholder because you’re not running the business.

[00:18:11] Kyle Grieve: And generally speaking, with larger and larger businesses, they’ve been around a lot. They’ve had to get financing. The insider ownership generally for a a company that’s worth billions of dollars isn’t gonna be super high, but evolution is around 18%, which I think is excellent.

[00:18:24] Kyle Grieve: I usually I prefer 10%. So they’re definitely. Doing well on that end. And then high returns on invested capital, like you mentioned. That’s honestly probably one of the most important numbers that you can possibly have. It’s a business that it was well above 50% for a long period of time, and then they went on this acquisition spree.

[00:18:41] Kyle Grieve: And I’ve gotten a lot of questions about this that oh, why did it drop a lot? And there was one of their acquisitions, they ended up using a lot of their stock to pay for, and that increased their equity base, which is why it’s their return on invested capital has dropped. But even if you look at it’s going up the, it’s going up linearly the last few years since they’ve made those acquisitions, and it’s still above 20%.

[00:19:00] Kyle Grieve: So I’m happy with it on that end. And the margins their margins are insane. To be fair though if you are comparing it to other iGaming businesses, it’s just the industry has insane margins. So you can see that as being good as a shareholder, but you can also see it being bad because it’s also gonna attract a lot of competition, which it is.

[00:19:19] Kyle Grieve: But evolution has some unique characteristics that are protecting it, which we’ll go over it in the future. But yeah, eBITDA margins sixty-eight percent operating margins, sixty-three percent, net margins of fifty-eight percent free cash flow margins, sixty-two percent. That’s just, it’s hard to find businesses that, that can do that for a long period of time.

[00:19:36] Kyle Grieve: And then on top of that, the thing that’s really interesting is if you go back 10 years, all these margins of doubled, like it’s insane how much margins or how much more money this business is just. Is making every single year. I’m not gonna assume that these are just gonna keep moving up.

[00:19:51] Kyle Grieve: It’s, everything’s slowing down at this point as it gets more mature. But their ability to maintain the, their margins right now seem pretty high for quite a few years into the future. And then I like looking at businesses that are growing. I’m looking at things like growing. Revenue, net income per share earnings.

[00:20:08] Kyle Grieve: So if you look at the ten-year, compounded annual gains in these numbers. So revenue is forty-seven percent, net income, sixty-six percent, and earnings per share at sixty-three percent. Then you want obviously a business that’s not gonna dilute shareholders, and they’ve done a pretty good job of that. We will be getting into their acquisition later in this episode, but if you look back over 10 years, they’ve diluted by about 2% per year and now they have this buyback program going on.

[00:20:31] Kyle Grieve: So I’m hoping that becomes a regular part of the business. I think a lot of shareholders, Clay probably would agree with me here. He’d like to see that. And then debt, obviously if we can find a business that can just operate and hopefully grow with zero debt or equity financing, that’d be perfect.

[00:20:46] Kyle Grieve: And E Evolution doesn’t need anything from anyone, so that’s awesome. Now, I personally, I don’t invest for dividend income, but they do have a dividend. It’s about a 50% payout ratio, and the dividend has been growing at 50% compounded annually. So if you do like dividends, this might be a name that interests you.

[00:21:03] Clay Finck: To paint some color around the dividend. It seems like they tell shareholders that they wanna pay out 50% of their profits as dividends. And since the business is growing, it’s a trailing, their payout ratio might drop below that 50% mark just because the business itself is growing. But when they look back, they’re trying to pay out.

[00:21:21] Clay Finck: Half those profits as dividends. So yeah, it is a dividend payer, which typically isn’t something Kyle and I are looking for. And to paint some more color around the size of this business, they report their financials, I believe in Euros. I see on Morningstar here, their revenues for twenty-Twenty-two were just under 1.5 billion Euros.

[00:21:41] Clay Finck: And then I’m Switching the lens to US dollars. The market caps around twenty-four billion US dollars. And to be fair, their growth has been. Just simply amazing over the last decade. But as you mentioned, it has slowed down drastically as they’ve scaled up. For example, 2020 revenue grew by 53%.

[00:22:00] Clay Finck: 2021 revenue grew by 90%, 20, 22 grew again by 36% after that huge boost after COVID. And then they, it seems that they’ve started to run into some growing pains and they’ve talked about this in the reports, their revenue over the first nine months of 2023, which is the most recent data we have at the time of recording, that revenue was up 26% year over year, which is still pretty dang good.

[00:22:25] Clay Finck: And the most recent quarter had revenue growth of 19% and then profit growth of 23%. And these growth levels are still very impressive to me. And you mentioned the margin expansion over time and I think that’s still an indicator of a strong moat of if their margins are continually able to increase, then you know, they have strong pricing power and they have strong business economics within their business.

[00:22:48] Clay Finck: And I was reading one of their recent reports and they talked about how there’s more demand for their products than they’re currently able to fill. You talked about the live casino aspect where they need to have dealers in place to service all these users and they’re just like we can’t expand to meet all the demand that’s out there.

[00:23:07] Clay Finck: And that really tells me that they’re certainly operating from a position of strength right now. And having more demand than you can handle is certainly a good problem to have. And really gives them, I think a lot of pricing power as well and just points to the strength of this business.

[00:23:24] Kyle Grieve: I couldn’t agree more. And you could make the argument that even this has been a bit of a management fumble in some areas that why are they allowing this to happen? But I have a high degree of trust in management that they’ve done a really good job, especially organically inside of the business.

[00:23:38] Kyle Grieve: And I think that’s something that they’ll be watching for. And I think, like you just mentioned with employees, one thing that’s really important is to track how many full-time employees they have. ’cause that’s very important to the business. ’cause Yeah really it’s a pretty nice problem to have where it’s oh, we can’t hire enough people or open enough studios to, to meet the demand.

[00:23:56] Kyle Grieve: So I think they’ll get moving on that pretty quickly though. 

[00:23:59] Clay Finck: And they don’t have a ton of turnover that should be of concern at upper management. But when you go down to the dealer level, they’re gonna have a lot of turnover where people just get burnt out dealing. And that’s certainly understandable.

[00:24:13] Clay Finck: It’s not a job that a lot of people are looking to have as a career, but there’s a lot of younger people that can earn decent income by doing something like this. So that’s just something that’s just a growing pain for evolution. Just how are they going to be able to hire. All these dealers to run their tables.

[00:24:29] Clay Finck: And I wanted to mention this research that was done by Ulta Fox. You had mentioned this to me when you had done research on it. They had a report on evolution, which I’ll be sure to link in the show notes. And they list a number of tailwinds that have led to the growth of the live casino market. And I think a lot of it just made total sense that I just wanted to tie in here looking at Evolution’s 2022 annual report.

[00:24:50] Clay Finck: They cite a statistic that from 2018 through 2022, the live casino industry as a whole had grown by 21.5% per year. And then the land-based casino market had shrunk by 4.7% per year. Turning back to the Ulta Fox research, the first tailwind they mentioned to why this growth has been so strong in the live casino space is lower latency internet and broadband.

[00:25:14] Clay Finck: So as technology continues to get better and better related to the internet, then this creates a better user experience within these live casinos. And then this also relates to better camera technology, better streaming technology. There’s that saying that software is eating the world. So as these products and services get better and better related to the internet, then businesses around that space are gonna continue to benefit from that.

[00:25:38] Clay Finck: And then another tailwind we’re gonna be talking about today is just the regulation of iGaming. And that’s globally more and more countries are adding more regulations and making it more of a place where businesses know you know what the regulations are gonna be. Because there’s these gray area markets where businesses don’t really know what direction.

[00:25:58] Clay Finck: The country’s gonna head in terms of regulation. So evolution is really in talks with regulators all around the world. And that may be with countries that already have a framework in place, or it may be something like the US where only five states have approved live casino and more are looking to get into that.

[00:26:15] Clay Finck: And then Europe is actually evolution’s most mature market. So Europe’s is a case where most countries have regulated markets and evolution has an established position there, and they’re growing as fast and Europe as they are in some of the other areas. As more countries put regulations in place, then this is, I believe, is going to be a really strong positive trend for Evolution’s business.

[00:26:38] Clay Finck: And I’m not sure about the people you’re connected with Kyle, but so many people my age are really interested in sports betting and Ulta Fox lists. One benefit for evolution is the ability of these casino operators to be able to cross-sell sports betting with their other offerings, live casino being one of them.

[00:27:00] Clay Finck: So you know, there’s this. Big trend, at least from what I’m seeing to people getting more and more interested in sports betting and then hey, they go out and discover some of the things that evolution offers, especially with releasing over a hundred games in 2023. There’s plenty of thanks for people to get interested in discover and new ways to gamble, which we will also be touching on today.

[00:27:20] Clay Finck: I personally don’t gamble too often, but when I’m on a trip with friends, we’ll go to a land-based casino from time to time. And honestly, I think it’s important to mention that I just don’t have a super pleasant experience going to a lot of casinos, a lot of casinos here in the US a allow smoking.

[00:27:37] Clay Finck: A lot of times you’re surrounded by people you’d probably rather not be around. And when you think about having the ability to play blackjack or whatever online casino game in the comfort of your own home I, I think that’s a pretty strong value proposition. And I think there’s also something to be said about the experience of actually being there in person seeing the dealer.

[00:27:57] Clay Finck: Face-to-face. So there’s definitely some give and take when it comes to this trend to online live casinos, and as I mentioned, seeing the dealer, having people around you, having that in-person experience. But I think in the end, overall, it’s definitely a win-win for evolution that this trend to online gambling is obviously going to be really important for them.

[00:28:17] Clay Finck: So I don’t know if you have anything to add related to these tailwinds that evolution is seeing? 

[00:28:22] Kyle Grieve: Yeah, no I tend to agree with you. Me and my friends do a little bit of sports beddings probably by far the most. I haven’t been in a casino, a live casino for many years. And yeah, when I would go it was, yeah, full of people that aren’t the most interesting.

[00:28:37] Kyle Grieve: Luckily in Canada you can’t smoke in them. So it’s a lot more manageable. But yeah it’s a lot of people who are sleepy and inebriated, not exactly the people that you want to spend too much time around. So yeah, that definitely is a big tailwind that you could get the similar experience, but from your comfort of your own home.

[00:28:55] Clay Finck: And I forgot to also mention that most casinos aren’t gonna be like in your backyard. They’re gonna be 30 minutes or an hour away, and it’s not gonna be super easy to get to. So it’s quite a trip to go and do that. And then online it’s just like click of a couple buttons you’re on and you could be spending your money at a table.

[00:29:12] Clay Finck: I mentioned the regulation of markets. So let’s turn to this part here. Could you talk about the difference between a regulated and an unregulated market for regulation? 

[00:29:24] Kyle Grieve: It’s hard to define because especially with the unregulated market, there’s no real definition that I could really think of or fine.

[00:29:31] Kyle Grieve: So we’ll start with regulated markets. So a regulated market. Can mean multiple things, but the way that I think of it is that they have some sort of regulatory body overseeing their games that they’re offering in a specific demographic. But so it, but it’s to degrees, right? You could have a regulatory body that’s looking at the entire country.

[00:29:49] Kyle Grieve: You could have it in North America at a regulatory body looking just at one state or in Canada, just at one province. And then in some cases with Evo’s games, they might be regulated by, for instance, a national body, but then be taxed locally or provincially or in a municipality. So it definitely a little bit muddy, but when you look at the unregulated market, that gets even more muddier.

[00:30:11] Kyle Grieve: ’cause the unregulated markets include a lot of emerging markets. They might have small amounts of regulation in certain areas of the business, but not in others. So it’s a more incomplete setup. And then regulation in unregulated markets is a lot more disruptive because sometimes you’ll get these gray market business units or if they’re operating in gray areas, all of a sudden they’ll become regulated and then all the regulators will come in and they’ll actually wanna basically punish the unregulated casino operators that were there beforehand.

[00:30:42] Kyle Grieve: So there is that is a degree of risk for the business, and that’s, I think, a huge reason why people get scared of the business is this unregulated market. So I know Betson. Used to be in the Dutch market and they essentially just basically pulled out, and I’m not entirely sure what the details of that, but I have a feeling they were having problems getting their license from regulators.

[00:31:02] Kyle Grieve: And then there’s another operator called Entain, and now they only operate in regulated markets. You can make an argument that regulated markets are just a lot more stable than unregulated markets. And I,, I probably would agree with you on that end, but the unregulated market markets are just massive all over the world.

[00:31:17] Kyle Grieve: So just skipping them entirely means you’re giving up a lot of potential customers. And then, as far as I know, for the revenue model that they have, it’s the same regardless of being unregulated versus unregulated. I’m not entirely, I haven’t found anything that shows me that there’s any difference between their business model based on regulation versus unregulated markets.

[00:31:37] Clay Finck: Yeah, so I think a lot of people would say the reason evolution looks like such an attractive investment opportunity is because you aren’t taking into account all this unregulated revenue they’re bringing in. So it seems like the market is discounting this unregulated revenue with the potential of that potentially maybe going away in the future, or there’s just a, there’s just this uncertainty of what that is going to be five years down the line.

[00:32:05] Clay Finck: Do you have any comments on how we should be viewing this unregulated revenue and maybe what that looks like from the big picture for evolution? 

[00:32:15] Kyle Grieve: Yeah, so I think as of the last quarter, I think they have about 60% of their revenue coming from unregulated markets. It’s not a low number.

[00:32:24] Kyle Grieve: So the way I look at it is that evolution is a global company, right? So let’s say one country, a small country, decides to regulate and they don’t like evolution and they say evolution, go kick rocks. We don’t want you here anymore. Which that could happen. It hasn’t happened, at least that not disclosed to us yet.

[00:32:42] Kyle Grieve: But the thing is because evolution number one is very geographically diversified, one small country is gonna be like a very small dent in it. Obviously if it was like the US and that wouldn’t be very good. But my other point being is that they’re also always in talks with regulators. Like it’s not like evolution wants to be in these unregulated markets.

[00:33:01] Kyle Grieve: They’re perfectly fine with it transferring over to regulated markets. I’m pretty sure that they’re very eager to get licenses and get whatever type of accreditation if a country is going to regulate. I know. The Philippines just recently regulated, and I believe they have their games in the Philippines.

[00:33:16] Kyle Grieve: As more and more countries regulate, I think that evolution will be there. And then another thing on regulation that you have to think about and that I think about often is countries are you can have your stance on gaming and whether it’s good or not or whatever, but the thing is it’s tax money, right?

[00:33:29] Kyle Grieve: You basically, you’re just printing tax dollars for whether that’s national, state, provincial, whatever. And tax dollars are hard to come by and this is a pretty easy lever for people to press to basically get more tax dollars and do with it whatever you’d like. And then like also what Clay was talking about with people thinking that the regulated market should deserve, say, like a higher multiple than unregulated market.

[00:33:51] Kyle Grieve: I don’t even necessarily disagree with that. You could be right, because yeah, the regulated market, it’s a lot more stable and it’s more certainty as well. And obviously the market loves certainty. So that’s one way of looking at it. I just don’t think that they’re gonna lose their unregulated market share at a quick rate anytime soon.

[00:34:07] Kyle Grieve: So yeah, you have to take that into account when you’re. Value in the business. 

[00:34:12] Clay Finck: Yeah. It’s funny you mentioned the tax aspect, just pointing to the incentives of these governments around the world. In Lincoln here where I’m based, there was recently a casino that opened and it was the very first one that was opened in Nebraska that I’m aware of.

[00:34:29] Clay Finck: And many people were against this, but it just seems like this inevitability where governments need a way to fund what they’re doing and bring in this tax dollars and it just feels and inevitability in so many of these areas of the world. So how about we turn to the revenue breakdown for evolution geographically, what continents do they have major footprints in and where’s some of their biggest growth coming from?

[00:34:59] Kyle Grieve: So just to start off with the geographic distribution. So Europe’s around thirty-eight percent and I believe this is of last quarter, Europe is thirty-eight percent, Asia is thirty-eight percent. North America, 12%. Latin America is 7% and others 4%. So all the areas are growing right now. There is, like Clay mentioned earlier, a little bit earlier with the slowdown in Growth North America, which was growing very fast, has slowed down a little bit.

[00:35:25] Kyle Grieve: So that’s been a bit of a drag. But Asia and Latin America right now for evolution are the fastest growing markets. Latin America is going through a lot of regulations and legalization and I think that’s a huge market for evolution in the future. And then, yeah, so if we look at growth drivers in the future though, North America still is, I think one of their biggest growth drivers.

[00:35:45] Kyle Grieve: You could probably say Asia is the number one, but North America is huge. And the thing that’s interesting about North America is that there’s just. There’s a lot of disclosure, so you can figure out how many states there are and make your projections from there. But yeah, like Clay said, games are available right now in five US states.

[00:36:01] Kyle Grieve: Obviously there’s a lot of states and even if you can make the argument that it will never be legalized in, in every state in the us and that’s perfectly fine even if it gets to 50 to 75%, that, that’s a large number of states and a lot of people that they can continue serving. So I think that they have a lot of ability to continue scaling up, to get to, and a lot of ability to also get a lot of their unregulated revenue transferred to regular revenue.

[00:36:28] Kyle Grieve: And I do think that the North American market will be a pretty big contributor over the next few years as well. 

[00:36:34] Clay Finck: We talked about the very good economics of evolution’s business and the growth of the market overall, and the attractive economics is going to attract quite a lot of competition. So talk about the competitive landscape of the live casino market.

[00:36:52] Kyle Grieve: So live casino, it’s interesting because if you look for direct comms, it’s really hard to find. And the reason is that a lot of the businesses that are in iGaming are also in other things like a lot of them have sports books and unfortunately as good as, or as fun as sports books are for certain people, the economics just aren’t as good.

[00:37:11] Kyle Grieve: So essentially if they have a live iGaming section, it gets dragged down by other sections in their business. And then, so yeah, so as a pure play it’s pretty hard. Playtech, they’re good, they have eighty-nine percent of their revenue from regulated markets, so that’s very good. Entain also is another business which operates exclusively in regulated markets.

[00:37:30] Kyle Grieve: And then Betson is another one that is focused on regulated markets. But I couldn’t find a percentage that they disclose. And I have a feeling they’re not taking on any more business onto unregulated markets. So you are seeing some of these businesses move away from unregulated markets, which actually could be one of the reasons why Evolutions share of the unregulated market just keeps on increasing.

[00:37:49] Kyle Grieve: ’cause they’re just onboarding that on. And then in terms of RNG. Which they do have a section pragmatic gaming, which is private, so it’s really hard to find out much about them. But they’re really good. So from what I was able to find, they have actually superior margins compared to evolution.

[00:38:06] Kyle Grieve: So I found that just from Ali Gundas who’s a really good account to follow on Twitter if you’re not if about evolution. But yeah, and they’re a RNG. Margins are really good at like EBITDA margins I think are well into the fifties. So clearly pragmatic is doing something right here. Ray and I also got the chance to speak with Srivas Wanathan, who’s also a professional investor and he owns the business as well.

[00:38:27] Kyle Grieve: And he said that the RNG businesses that they have bought have helped with increasing the overall margins of the business. So that’s kinda one, one interesting point about RNG, but generally speaking, it seems like the live casino is the most attractive area and luckily that’s where they’re focusing the most.

[00:38:45] Clay Finck: I’d like to also talk about Evolution’s competitive advantage in Moat. Currently they, the most recent number I saw is that they have a 60% market share in the live casino industry. And I think one of the key things Evolution has done, as you just mentioned, is that they put a huge focus on this from the beginning.

[00:39:06] Clay Finck: We mentioned the RNG, but Live Casino, it seems to be the core of what they do. And all these other companies have live Casino just as a part of their business. And they might not have near as many games as Evolution does. Their expertise around this might not be near as strong. And you mentioned the one-stop shop.

[00:39:24] Clay Finck: It seems that so many of these casino providers just see evolution as just the obvious solution to what they wanna provide in terms of live casino. So talk to us about Evolution’s competitive advantage then. 

[00:39:38] Kyle Grieve: So I’ve thought a lot about it and they definitely do have some competitive advantage.

[00:39:42] Kyle Grieve: If you look at their numbers, of course they have competitive advantages. They wouldn’t be putting up those types of margins if they didn’t. If you are just thinking about, could someone theoretically just build a casino game and offer it to someone else yes they could.

[00:39:55] Kyle Grieve: In terms of barriers to entry they have their own barriers to entry. But to me it’s more to do with the scale and the size of the business that a small if some one employee business wanted to come and try to compete, it would be very hard. And so I think a big reason of that is that evolution has their fixed costs and there’s pretty much there’s no way that some small business is gonna be able to keep their fixed costs as low as a percent of their overall revenue as the evolution would be able to.

[00:40:22] Kyle Grieve: They’ve also just done really well on previous initiatives that they’ve talked about. And they’re, every year they seem to just do a really good job of operating their business the way they say they should be. And at a very high level. But is that a moat? No, it’s not. But so scale to me is definitely their mode.

[00:40:38] Kyle Grieve: They have some sort of network effects like you just mentioned, with just one stop shop. Like if, let’s say someone created one game and they offer it to you, that’s great and that’s cool. If you go on an evolution game, you can see that one game and then you can theoretically get moved on to hundreds of other games.

[00:40:53] Kyle Grieve: So that definitely is a huge advantage. And then also if you are a casino operator and you’re looking to bring games in are you gonna bring in one game that you have to pay? Picks costs too or are you gonna bring in evolution which has hundreds of games And you have to imagine that some people wanna play the specific games that Evolution offers.

[00:41:13] Kyle Grieve: So if you don’t offer their games, people will just simply go to another operator. So yeah, it definitely has some types of network effects there. And then also there are some switching costs, right? Setting up a studio definitely is not cheap. Todd Househalter has talked about this and it’s not only is it not cheap, but it’s not really, it’s not a, an operation that you can just pick up right away.

[00:41:32] Kyle Grieve: They’ve perfected it ’cause they’ve been doing it now for such a long period of time. Yeah I would say scale is probably their number one competitive advantage. And they definitely do have to be on to stay on top of things because there are competitors out there that are doing well and that are trying to come and take some of their market share.

[00:41:48] Kyle Grieve: They can’t just sit on their laurels. They have to be innovative. But that’s why they have Todd Househalter that guy he’s like the Steve Jobs of casinos. This guy just like I. He’s been creating games his whole life since he was a kid, and he has to keep doing that in order for, I think, evolution to survive.

[00:42:02] Kyle Grieve: You definitely have to pay attention to innovation and make sure that they’re staying on top of things. But so far they’ve been doing a really good job, like Clay was talking about with the amount of games in 2023 they made a hundred and how much that’s gone up. And I see that just continuing to keep going up over time.

[00:42:18] Clay Finck: You mentioned innovation and I was reminded that evolution in the live casino space certainly seems to be the innovator, whereas you have all these other companies that see the success of what works within Evolution. And you’ll see a lot of ’em just imitate a lot of the games. And one of the ways Evolution has differentiated themselves is to create these branded games where they become known for the these branded games.

[00:42:44] Clay Finck: And you can’t just copy and paste. Exactly. And I think that’s a really strong indication where evolution is really the leader in this space. And then others are just trying to keep up with what they’re doing. And there’s a few other points I wanted to mention here in regards to the competitive advantage.

[00:43:00] Clay Finck: It’s, I think it’s so easy to just think. You set up a camera, you set up a table, you grab a dealer, start dealing some cards and start setting up your business. But it really isn’t that easy. I think Sri, Viswanathan, you mentioned him, he had this quote that I loved where he said the barriers to entry is low, but the barrier to execution is high.

[00:43:24] Clay Finck: So you mentioned all these things that can happen with the table. A card flips over, you drop a card or whatever else. There’s all these standards of practice that you need to have in place. You need to be working with regulators to make sure that you’re doing things right. And the scale is so important.

[00:43:41] Clay Finck: You not only have to offer a better value proposition to the casino operator, but you also have to be able to operate at a large scale to make any money. You can’t just open up one table and expect to get the same level of traffic that Evolution’s gonna be getting. So there’s so much fixed cost that goes into this, and it’s just a big hurdle that companies need to get over to really make any money.

[00:44:05] Clay Finck: And there’s a few points related to this that I wanted to mention. Europe is Evolution’s most mature market and not a single land-based casino has a live casino offering that’s created in-House. So it, there’s been all these years where they’ve paid evolution to host these games to offer these games for them.

[00:44:25] Clay Finck: And not a single one of them have said, Hey, it’s, we’d be better off doing this in-house. They’re much better off just doing it through evolution. So the, again, the barrier to entry is low. But the barrier to execution is high. And then you look at the US companies like FanDuel, DraftKings, Penn, all these companies that many people are familiar with, they’re all working with Evolution.

[00:44:45] Clay Finck: And these are big companies. They have money. They could theoretically do live casino themselves, but they don’t because the implementation is just so difficult. And then there’s just a high level of fixed costs. There’s the uncertainty of having to compete now with Evolution, who’s innovating a hundred games a year, and if you’re going to be in this business, you’re really going to need to do it at scale.

[00:45:07] Clay Finck: And yeah, it’s just a tough space to be in and it’s just such an interesting dynamic where evolution, they’ve been doing this, I believe, since 2006 and they’ve really been the leader in this space and really tough to compete with. Alrighty. Let’s turn to Evolution’s management. What are some of the things you found that are important to highlight here on their management team?

[00:45:30] Kyle Grieve: So management I think is good. I like how they have the high insider ownership. Like I mentioned they’ve done a good job executing obviously all management teams, they have their patches of hair that maybe they could improve upon. So a couple things it would be nice if they gave a little more disclosure, for instance, in their geography and where revenue is coming from.

[00:45:50] Kyle Grieve: However you can make this argument that they, like you said, it’s an incredibly highly competitive environment and they probably don’t want. Their competitors knowing all this information about them. So I think that their part of the reason that their disclosure with specific geographies and countries are, I mean they don’t talk about it at all, is specifically because they don’t want competitors knowing, okay, I should focus on this country or that country or whatever.

[00:46:15] Kyle Grieve: And so as a result of that, they just don’t share anything with shareholders. Unless you’re an insider it’s hard to figure out that kind of information. Yeah, I mean I don’t think that’s probably gonna change anytime soon because it’s getting more and more competitive.

[00:46:26] Kyle Grieve: So like an example was, for instance, they used to have Europe and they used to have England as their own little market where they would show, but now they’ve just put England all the way into Europe. So you can’t even tell is England doing really well or is it the rest of Europe or whatever.

[00:46:40] Kyle Grieve: And of course they know this, but they’re not gonna share that. The inside ownership, like I said, I think it’s 18%, so nice and high. I love seeing that. They also have some insider buys on the open market, which is obviously super bullish. And then so yeah, so then there’s been a big thing lately about their incentive program.

[00:46:57] Kyle Grieve: So they recently came up with this incentive program to use warrants as part of incentives. And generally speaking, not super I don’t think any shareholder is super enthusiastic about DI getting diluted, but we also have to remember that evolution. Is essentially a tech company. They have to innovate and build tech in order to compete.

[00:47:18] Kyle Grieve: And in order to do that, they have to not only attract talent, but they have to keep it there. And with the history of Evolutions shares, it’s a valuable asset, right? So they know that, and now they’re using that as part of their incentive structure for the board members. It’s not my favorite the way that it they did it, but I’m hoping that it’ll keep some of the talent that they have there because they do have a lot of talent and that matters.

[00:47:41] Kyle Grieve: Then when we look at capital allocation, that’s been a point of contention in terms of some of the acquisitions they’ve made over the past few years. I think we’ll cover this a little more detail later on the episode. So when it comes to their segments, like Clay said they’ve been mainly focused on live, and I agree with that, and that’s where their excellence really comes from.

[00:48:01] Kyle Grieve: If they probably just never even bothered touching RNG, I’m sure they probably would’ve done very good. If you just look at how they’ve excelled. So in 2020 they had 700 tables, now they have 1300. So you know that’s growing at a very nice rate. And as we talked about earlier, they can probably increase that at high rates as well.

[00:48:18] Kyle Grieve: ’cause they have more demand than they can keep up with. And then, yeah, looking at the amount of people they have. So back in twenty-twenty-one, or sorry, back in twenty-eighteen, they had forty-three hundred full-time employees, 7,000 in twenty-twenty-one. And right now they’re at 13,000. So you know, they’re doing a pretty good job of finding more and more employees to work the tables, which obviously helps them make more money Since twenty-twenty live game revenue has increased by forty-three percent.

[00:48:42] Kyle Grieve: So they’re doing a good job on that end. And then, yeah, so like we talked about with the dividend policy, they are sticking with that 50%. They’ve had some pushback on it. ’cause people would rather just see them put money back into buying the stock. And you can make that argument I personally would love to see them just buy their own stock, but it’s pretty well-priced now, but there’s been times where it’s, it hasn’t been well-priced.

[00:49:07] Kyle Grieve: And maybe not buying back would’ve been the right decision, but as of now I don’t see them stopping the 50% dividend. Yeah. So with the dividend policy, it’s gonna stay and I’m hoping to see a it would be really nice to see them say, okay, we’re gonna keep paying 50% out as a dividend and then with the remainder plug, whatever we need to back into the business.

[00:49:27] Kyle Grieve: And then with everything else do buyback. I would love to hear them say that. They haven’t said that yet. But they are doing this buyback right now. They’re buying back a lot of shares. You can go on the website and they’re buying it all the time. So hopefully it if the prices stay here I think, I hope they just keep buying back shares.

[00:49:43] Clay Finck: Yeah, the 50% dividend policy, it’s something we as shareholders you just have to live with and just expect going forward. And hopefully they do transition to do more of those buybacks and they pull back the dividend a bit especially with the share prices at these levels.

[00:49:58] Clay Finck: But it share seems like there’s one investor who joined our community said it seems like there’s a capital allocation epidemic in Europe where maybe don’t make the best allocation decisions, especially when it comes to dividends. But sometimes as investors we just take what we can get sometimes and no company’s perfect and that’s something that evolution has got a lot of pushback.

[00:50:19] Clay Finck: In terms of the management for the buyback, I believe it was 400 million euros they announced in November, 2023. Certainly think that’s a very good decision. And it was just before that the CEO had a pretty big insider buy. It was a hundred million Swedish Kronor for an insider buy that he made. And I think that’s also a very good sign.

[00:50:39] Clay Finck: His insider purchases seemed to have been pretty timely because he also purchased shares in late 2022 at an even lower price. So that was a very opportunistic buy for him. And he sees where this business is heading and he understands capital allocation pretty well, even though the board seems to want this dividend policy and such.

[00:50:58] Clay Finck: And I think it’s worth highlighting the Todd Hosshalter, who we mentioned earlier, he’s the chief product officer. He has a very important role with evolution because he’s in charge of developing the new games and ensuring that evolution has the best of the best when it comes to live casino games. And it’s probably worth keeping an eye on him, keeping an eye on the number of new games they’re developing and how those are playing out.

[00:51:23] Clay Finck: And just seeing how that changes over time. And he does various presentations and he is, he’s fun to tune into. He had a recent presentation that he asked the audience essentially, what is the largest gambling company in the world. And many people are gonna be thinking, oh, evolution or some huge casino in Las Vegas.

[00:51:42] Clay Finck: But he put Coinbase on the screen and I just thought that was so funny. Coinbase has a, I just looked it up. They have a market cap of twenty-nine billion, Evolution’s at twenty-four billion. But I believe at the time of the presentation, Coinbase’s market cap was much higher. And his main point was that younger people.

[00:51:58] Clay Finck: They really treat money that goes into something like Coinbase or something like Robinhood. They really treat this money as if they’re investing, but in reality, they’re actually gambling because they’re just making these terrible bets on meme stocks or various altcoins or whatever else, and end up losing most of their money over time.

[00:52:16] Clay Finck: Simply put a, in my humble opinion, they don’t really know what they’re doing in terms of what they’re buying and understanding. The fundamentals. So it’s really not feasible to think that Coinbase is gonna be eating a hundred percent of the gambling market. But it’s interesting to think about how, it reminds me of Netflix, where the Netflix, CEO, he mentioned that Netflix’s biggest competitor isn’t Disney Plus or any of these other companies.

[00:52:41] Clay Finck: Their biggest competitor is sleep. And that’s what it reminds me of for evolution, where you know, the currency of today is your attention and obviously where you’re spending your dollars. And it’s why a company like Metta is just so valuable because they have so much of people’s attention and then obviously that gets advertisers.

[00:52:58] Clay Finck: So I think that’s the case for evolution where. They need people to generally want to spend time gambling within these types of games that they provide. And it’s a dynamic market people’s needs and wants change gradually over time. And that’s why they’re innovating. They’re continually making their games better, making these experience better.

[00:53:19] Clay Finck: And Todd Hall Salter is definitely super, super passionate about this stuff. You called him the Steve Jobs of this space and, which is quite funny. He definitely has a lot of passion for what he does and yeah, I think they’ll continue to do well in terms of this, but definitely a risk that people are gonna continue gambling, whether it be through Coinbase or whatever else.

[00:53:40] Clay Finck: And hopefully evolution stays on the forefront of that. 

[00:53:44] Kyle Grieve: I really like that comparison he made. And yeah, I mean there’s all sorts of ways to get people’s attention now and gambling is just one of them. But like you said gambling can take many forms. When people are on Robinhood and Coinbase, I don’t think they’re gambling, but you don’t like Todd Haushalter says you can make the argument that they are 

[00:54:02] Clay Finck: to the point on capital allocation.

[00:54:05] Clay Finck: They’ve, Evolution’s made a few big acquisitions where they issued shares to purchase some of these R&G companies. And the market’s treating this as pretty bad purchases. One, because they issued shares to do it and these R&G games maybe haven’t performed quite as well after the acquisition.

[00:54:24] Clay Finck: Plus you factor in the price they paid for them. But I think investors who own the stock make the case that there’s some synergies at play where these R&G companies overall have made evolution a better business. Even if you look at the individual business units, maybe they’re not doing quite as well as we’ve hoped.

[00:54:40] Clay Finck: So what are your thoughts on. Some of the acquisitions they’ve made in recent years, 

[00:54:46] Kyle Grieve: they’ve spent a couple billion dollars, whether that’s either through cash or shares on NetEnt, no Limit City and Red Tiger. None of them have turned out. Particularly they also bought them during I think it was in 2020 and 2021 when markets were pretty euphoric.

[00:55:01] Kyle Grieve: And so they probably overpaid for all of them. They’re all growing r and g section. If you, when you look at it, it’s only growing in kind of the mid single digits, which isn’t great. I don’t think that’s what they saw when they bought it. For instance, so NetEnt was purchased for 2.1 billion euros, and I believe it was all purely shares.

[00:55:18] Kyle Grieve: So if you, I went back and looked at the price, it’s about 12.4 times revenues and 26 times EBITDA, which for a high quality business doesn’t sound horrible, but you would also assume that there’d be a good amount of growth embedded in that as well. Yeah, like I, if you compare it to EVO’s numbers, at the time it was actually trading at a discount.

[00:55:34] Kyle Grieve: So maybe they felt because it was trading on a discount, it makes more sense to just use shares. But net end, it just, it turned out to not be growing anywhere close to the rate EVO and it’s, I, or live gaming section was growing. So it’s hard not to say that they didn’t overpay a lot for that acquisition.

[00:55:50] Kyle Grieve: And yeah, they made that acquisition in June of 2020 and the market was heating up at that point in time. If they maybe waited a little bit or if they bought it a bit, a little bit earlier at a bigger discount, then maybe it would’ve worked out better for them. Who knows it’s pretty hard to say, but yeah, in terms of their M&A work, it’s, I would prefer that they probably just stayed away from it and probably just kept putting money back into the dividends and into the buybacks and just into the live gaming section because the acquisition part just hasn’t done much for, to make, to deliver shareholder value.

[00:56:22] Clay Finck: That’s a good point that we should probably continue to monitor what they’re doing in terms of capital allocation, especially in terms of these acquisitions and the prices they’re paying for them. I think there’s, they’re mindful of this. I know they’re talking with investors and probably learning quite a bit in terms of they’ve received a ton of pushback in terms of the dividends and I’m sure they seem to be quite receptive to some of these feedback from shareholders overall.

[00:56:49] Clay Finck: He just released his 2023 letter and he mentioned that him and a group of investors met with the CEO in New York and he shared some insights in that letter that I’ll be sure to link in the show notes as well for those that are interested in some of the things he picked up just from studying the business over the past year or so.

[00:57:05] Clay Finck: So we can’t talk about any business here on the show or do a deep dive without talking about valuations. So their recent growth has slowed, which makes it a bit difficult to project where this business will be years into the future. How do you estimate their future growth and intrinsic value? 

[00:57:24] Kyle Grieve: Yeah, so with evolution I like to use just the simplest possible ways for evaluating the business.

[00:57:32] Kyle Grieve: So I just like looking at their earnings per share, which is, has been growing at a very high rate and then just projecting that out for a few years, putting a terminal multiple on it and then discounting it back to the, to present value. If you look at their EPS last decade has going at 63%, no chance that’s sustainable into the future, but we can look at what they’ve done recently.

[00:57:55] Kyle Grieve: So I think just looking at how revenue’s grown and how margins have been increasing, I think like a mid to high twenties percent for EPS seems. Seems reasonable to me. It’s less than half of what it’s been in the last 10 years, so I’ll just look. I’ll use that number.

[00:58:13] Kyle Grieve: Look out for the next few years and then put a, an earnings multiple. A terminal earnings multiple. That’s a little bit tougher to come across. ’cause you can say that the company’s gonna get more and more mature. So what kind of earnings multiple does it deserve? Is it gonna be just your standard 15 to 20 of a kind of an average business?

[00:58:32] Kyle Grieve: I don’t know. I guess you could make that argument, but I do think it’s it’s definitely not at an average business. I think it’s a above average business. So I think it deserves a little bit of a premium. It’s a business that’s at that’s traded at very high valuation levels in the past, but realistically something in the mid, early twenties sounds good.

[00:58:51] Kyle Grieve: So if you use those numbers and plug them in, you get about a 25% compound annual growth from here. If you wanna say that it needs a lower exit, multiply, so I used 23 here, you could make that argument and you’re probably still gonna get pretty good growth because it is growing its earnings at a pretty high rate.

[00:59:06] Kyle Grieve: And, but yeah, over time, they’re also gonna probably, hopefully get more and more regulated market share. So that’ll make their earnings, I think, a little bit more valuable. And you could justify putting a higher valuation on that app as they get more and more regulated revenue, which I think they will over time.

[00:59:22] Kyle Grieve: So that’s how I look at valuing the business. So just look at the, at what I think EPS will be in, in the next few years and just discount it to present value. And then also they do have those buybacks, so if they do the buybacks really well, that’s only gonna do increase the earnings per share.

[00:59:37] Clay Finck: Kyle, you and I,. We talk about, think about, discuss the idea of finding a multi-bagger investment amongst our community, amongst the discussions we have. And really the holy grail of finding a multi-bagger, I think is you want a small company that dominates its market. It has a lot of potential for future growth.

[01:00:00] Clay Finck: And the trick is finding that sort of situation at a fair price. And I really think you have really unique situation here with evolution in terms of their moat, the size of their market. If evolution were to lack in any of these areas, it’d be where they’re at in their growth journey. They’ve been doing this for over 15 years, so we’re 15 years into the story, but it sure seems like there’s still substantial room to run over the next decade.

[01:00:25] Clay Finck: And I’m reminded of something Monish Pabrai has talked about where ideally you’re in a situation where there’s low risk, but there’s high uncertainty. And when I look at evolution, I see you got these growing pains and hiring issues and. You know this turnover at the lower levels of the business. You have the unregulated markets in these gray areas.

[01:00:47] Clay Finck: You have competitors leaving the market. You know what’s gonna happen to that over the next five years or so, you have these acquisitions where it seems like they’ve overpaid. You have competition coming in and wanting to eat Evolution’s lunch, but despite all that, revenues take up year after year.

[01:01:03] Clay Finck: Earnings take up year after year and it’s like you have to figure out what signal and what’s noise and what’s your holding period with this. If you buy in and you need to sell your shares in three or six months, maybe you’ll lose money. That’s just the way the stock market is with any company.

[01:01:19] Clay Finck: And I think if for you and I, Kyle, we plan on holding onto it for at least a few years, unless our thesis of what we’ve talked about today is busted. But it sure seems five years from now, it sure seems like revenue and earnings are gonna be quite a bit higher than they are today.

[01:01:34] Clay Finck: And at the end of the day, that’s pretty likely gonna lead to pretty good stock returns for us as investors. 

[01:01:41] Kyle Grieve: That’s exactly how I see it. I really like your point too about low risk, high uncertainty. I think you’re completely correct that it definitely fits that into that mold. But yeah, like you said and Buffett and Munger always say you just wanna buy businesses that are gonna be a lot, have a lot more profits in a few years time.

[01:01:57] Kyle Grieve: And I feel there’s a very good chance that evolution does that. 

[01:02:01] Clay Finck: I think it was Chuck Awkri who said that you wanna find the two or three KPIs that are going to make all the difference within a business or within an investment. So tracking those KPIs over time and ensure that they’re heading in the right direction and point to the fact that your original investment thesis is intact.

[01:02:17] Clay Finck: What are some of the most important KPIs you would track for this company? 

[01:02:22] Kyle Grieve: So I completely agree. Every business has their KPIs that are important and it’s your job to figure out what they are. So a couple that I really like to track on pretty much a quarterly basis are employee count, which we went over.

[01:02:33] Kyle Grieve: You wanna see that going up and not down. And they’ve done a really good job on that end, how many tables they have. Like I mentioned, they’re at 1300. Obviously. Would love to see that keep going up because if the more tables they have, that probably means that they’re serving more customers and that means they’re making more money.

[01:02:47] Kyle Grieve: Ebitdom margins very important for them. They’ve expanded their EBITDA margins at really high rates, and you can put in any margin you really want here. They’re all going up they’re signaling of EBITDA margins going up. Definitely shows that they have competitive advantages. So you wanna make sure that’s, hopefully it goes, keeps going up.

[01:03:05] Kyle Grieve: It’s not going to go up forever, of course, but. You definitely just wanna make sure that it’s not going, coming down. That’s really important. A new studio growth. So this is something that’s been stunted lately. I feel, I trust that management will continue delivering on this. So it’s really important that they keep making new studios, ’cause that’s how they make more tables and get more employees in the door.

[01:03:24] Kyle Grieve: So that’s very important. Regulated and unregulated revenue share. Definitely would love to see the regulated market share continue to go up. As more and more of these businesses are their competitors, sorry, are trying to just. Take up the regulated market share there, there’s a chance that unregulated revenue just keeps growing for them.

[01:03:42] Kyle Grieve: So that definitely something you have to, you would have to be comfortable with. So that’ll be something interesting to just monitor in the future. But in your geographical revenue share, you wanna make sure hopefully that all geographies are growing, there’s gonna be some bumpiness, they’re not all gonna grow linearly, right?

[01:03:56] Kyle Grieve: You’re gonna have some that outperform others. Like north America was doing really well for a while. Now it’s slowed down and Latin America and Asia have gone up. Asia just seems to always grow for them, so it’ll be important that continues doing it. And yeah, those are my general KPIs that I track for them.

[01:04:12] Clay Finck: It’s funny, I can’t count the number of times I’ve seen on like Twitter or whatnot where someone sees evolution, they look up the company, they see it’s in the gambling space, and they’re like, the numbers look great for this company, but it’s a gambling company, or it’s iGaming and that’s just not a market.

[01:04:29] Clay Finck: I wanna get into, and it reminds me of the case of Meta. There’s been a time or two here on the show where I’ve talked about meta. I shared as what the motor end’s Doomsday analysis. That was in late twenty-Twenty-two that was near the bottom of Meta. I believe the shares are today are north of Three-fifty.

[01:04:48] Clay Finck: And at that time the shares were like 90 or a hundred dollars, so you’re up well over three X on that. But I never bought shares like his analysis totally made sense to me, and it seemed ridiculously underpriced. But I think you could say the same with other companies that never did rebound. So there’s some selection bias or survivorship bias here at play, but in talking about meta, why did I not buy shares?

[01:05:12] Clay Finck: The first thing that sticks out to me is that I’m really not that big of a fan of Mark Zuckerberg. And the second thing is I know that Metta’s products do harm overall to society, and we know that teens experience higher levels of anxiety, depression, and all these things partially because of these social media platforms that they’re on and how addictive they are.

[01:05:34] Clay Finck: And. They want people to just be stuck to their screens, stuck on their platforms. And I mentioned earlier that attention is seems to be the new currency today. And the reason I mentioned Meta here is because evolution is in the iGaming market, they have an incentive to make their games as fun and as addicting as possible.

[01:05:56] Clay Finck: So their users just come back time and time again and gambling more and more of their money over time. And it brings to this question of is it ethical for someone to own shares in a gambling company? And I think it’s a bit hypocritical for me to say that I don’t wanna own Meta, but I’m fine with own owning evolution.

[01:06:15] Clay Finck: And it’s interesting because part of the reason I think is that I personally enjoy playing cards and going and playing poker or blackjack or whatnot. And I have fun totally knowing that. The odds are stacked against me. Like over time I’m going to lose money and I might get excited the one time I go and win a couple hundred bucks, but I’m also aware that a gambling addiction is a real issue for a lot of people out there, so there’s really no easy answer.

[01:06:41] Clay Finck: I know that casinos likely aren’t going anywhere, these governments to earn tax dollars off of them, and they enjoy that. So I’m curious to hear your thoughts on this. What are your thoughts on owning shares in a company like Evolution where they’re providing a product? Obviously people enjoy using the product, but it might not be beneficial in terms of using it for a lot of people.

[01:07:03] Kyle Grieve: In my opinion, investing is a very personal endeavor and you can really make an argument for or against anything really. And what one person thinks is right, another person might think is wrong. And it’s really hard to say one thing is right for everything. One, one thing is right for everyone and one thing’s wrong for everyone.

[01:07:23] Kyle Grieve: Cause I agree with you because I personally find gambling fun. I have no problem going and gambling and accepting that essentially I’m just paying for entertainment. I’ll go and maybe I’ll spend a hundred bucks or whatever and if I lose it. That’s perfectly fine. That’s just the price you pay for entertainment.

[01:07:39] Kyle Grieve: I don’t go in there thinking that I’m gonna lose this money and then I’m gonna go back to the ATM 50 times and make it back. But unfortunately there are people who do that. But yeah, so I think you have to figure out for yourself. If you think that this is, that gambling is not a industry that you wanna be in to own a business, then don’t own the stock.

[01:07:57] Kyle Grieve: Perfectly fine. I don’t judge you for that, just as, I hope you don’t judge me for owning it. But look at Buffett, right? He owns Coca-Cola, and he won’t own all sorts of other businesses, but Coca-Cola is the pro. I don’t, I personally don’t think the product’s very, it’s not healthy.

[01:08:12] Kyle Grieve: I don’t I don’t think, I think that I know it, it’s a fact. But you, you can warp and twist anything into your own mind. And whether it’s right or not I don’t know. Yeah, it’s your money. You can do with what I do with it, whatever you want. But for me, I’ve tried their products, the Evolutions products, and I think I like it.

[01:08:30] Kyle Grieve: I think I find it fun. And for me, that’s all I really need to know in order to buy the stock. 

[01:08:35] Clay Finck: Awesome. And Todd Hall Salter, he’s talked about just thinking about the end user and what’s best for them. And I honestly don’t think he means to hurt users in the way that maybe some other companies do.

[01:08:48] Clay Finck: You wanna partner with good people in terms of the management team. And yeah there’s certainly a liking bias at play here where he’s fun to listen to. Seems like a great guy who knows what his true intentions are. And it’s a good reminder that life and investing is just messy.

[01:09:04] Clay Finck: There’s no easy, there’s no simple answer, and no company or product is necessarily perfect. And you’re certainly right with regards to Buffett and Coca-Cola and I’ve said the same thing when I was talking about meta too. So Kyle, I don’t wanna hold you too long here. I really appreciate you joining me.

[01:09:20] Clay Finck: And it’s been a fun discussion and I’m sure the listeners will enjoy tuning in. I’d love to hear some feedback from some of the listeners. So how about you give a handoff to how the listeners can get in touch with you if they’d like. And also please mention everything you’ve been doing with TIP because you’ve recently transitioned to become a host on, we study Billionaires and hosting episodes here.

[01:09:40] Clay Finck: So you can also just mention what you’re up to within TIP. Yeah, absolutely. 

[01:09:45] Kyle Grieve: The easiest way if you want to get in touch with me on social media is just through Twitter. It’s at Irrational, MRKTS, Irrational markets. I’m on there very active. You can feel free to DM me. Any questions, I’ll probably get back to you.

[01:09:58] Kyle Grieve: And then, yeah, with TIP, I’m on two podcasts. So I originally started on the Millennial Investing podcast and now I’m doing an episode every two weeks on We study Billionaires. So I’ve had a few episodes on there that have pretty good reception and I’m really enjoying that. So yeah, if if you enjoy listening to this podcast of you probably already on We Study Billionaires, but I’m also on Al Investing podcast, so you might wanna check out that feed as well.

[01:10:20] Clay Finck: Awesome. I can’t wait to chat with you again next quarter and see what company we find it to discuss then. Thanks so much, Kyle. I really appreciate it.

[01:10:31] Clay Finck: Alright, so like I said in the intro, I wanted to include a segment here that dives into the events we have planned in Omaha in May of 2024 during the Berkshire Hathaway shareholders weekend. That’s from May 3rd through May 5th, 2024. First, I’m going to outline what’s happening with our TIP Mastermind community, and next I’ll touch on the Berkshire Summit, which is a much more exclusive event.

[01:10:53] Clay Finck: So for the TIP Mastermind community, we have two social events planned. One for Friday and then one for Saturday night. These two social events are exclusive to members of our mastermind community, which is a paid group that our audience members have to apply to be a part of. We have some space booked out in downtown Omaha, and members are going to come, socialize, have a few drinks on us for that evening, and network with other members of the community.

[01:11:16] Clay Finck: And that’s just one of the really fun things about it is knowing these people online, connecting with them, and then eventually getting to meet them in person. We had started the community just prior to the Berkshire meeting last year, and we created it to have a place for like-minded investors to connect with each other, but also do other things like collaborate with TIP hosts like Kyle, Stig, and myself.

[01:11:36] Clay Finck: Get access to Q&A sessions with special guests like Chris Mayer, Toby Carlisle, Gautam Baid, and Ian Cassel. And also get access to the two in-person live events that we host each year. One of my personal favorite things about the TIP Mastermind community is to have a network to bounce stock ideas off of or even get new ideas to add to my own watchlist and portfolio.

[01:11:58] Clay Finck: The Mastermind community has actually become my number one research for getting new ideas. The live events we’re hosting in Omaha are just a small part of why we set up our TIP Mastermind community. We recognize that so many people don’t have a network of like-minded people to bounce ideas off each other, and it was even a need for me personally as an investor.

[01:12:17] Clay Finck: Just being a part of this group has been such a pleasure, and I’ve met with so many amazing people, some of which have become friends of mine since starting the community back in April, 2023. I’ve just been amazed by the number of high quality people that are joining from all sorts of backgrounds in all sorts of places in the world.

[01:12:35] Clay Finck: We currently have around a hundred members of the community and will be capping the group at 150 members in order to keep it high quality. I’ve had a number of people ask me what types of members are in the group. We really have a wide range of people that are joining. We have some people who are earlier on in their learning journey, and then you have people that work in the investment industry.

[01:12:54] Clay Finck: But the key theme is that all of us really come from this value investing school of thought, and we primarily talk stocks and not too much about other asset classes. And a lot of people, I’ve noticed, have this sort of quality framework where they’re definitely looking for something high quality and not so much deep value or cigar, but type investors.

[01:13:13] Clay Finck: No matter where you’re at in your personal journey, we are confident that you’ll find like-minded value investors in the group who are very much on the same journey as you at the time of recording. The price to join is 100 ninety-seven per month, or 1970 per year. And this is subject to increase in the future.

[01:13:30] Clay Finck: You can learn more about our Mastermind community by visiting Theinvestorspodcast.com, or simply emailing me at Clay at Theinvestorspodcast.com. The website is going to direct you to our waitlist, and if you’re specifically interested in meeting with us in Omaha, then you can expedite the process and just shoot me an email at Clay at The Investor’s Podcast.com.

[01:13:52] Clay Finck: That’ll speed things up a bit for you. Again, our events are specifically for the community and we are not going to be hosting any other events outside of the summit. So turning to the Berkshire Summit here, this is a much more private, smaller, and more exclusive event for those who really wanna make the most of their time in Omaha.

[01:14:10] Clay Finck: We’re hosting two very special dinners on Friday and Saturday evening, and a number of very special guests are going to be joining us, some of which have been the more popular guests on the Richer Wiser Happier podcast. We’ll also have a social hour after each dinner for whoever would like to stick around for those evenings.

[01:14:27] Clay Finck: And I’m going to be organizing this event and really just helping attendees have a really great experience during their time here in Omaha. This is actually going to be my fifth time attending the Berkshire meeting, so I definitely have a feel for what’s happening in Omaha. I used to live there and I’ve been to many of these events a number of times.

[01:14:44] Clay Finck: We’ll be sure to have great seats safe for you at the meeting. Make sure it’s easy to get around Omaha and get to our dinners and make sure you’re in the know on what’s happening with other events. I personally think both social events we’re hosting will prove to be fantastic networking opportunities with very high quality people.

[01:15:01] Clay Finck: To learn more about the Summit, you can visit theinvestorspodcast.com slash Berkshire Summit or simply click the link in the show notes or even email me at Clay at theinvestorspodcast.com. With that, thanks for tuning in to today’s episode, and I look forward to meeting you in Omaha.

[01:15:18] Outro: Thank you for listening to TIP. Make sure to subscribe to Millennial Investing by The Investor’s Podcast Network and learn how to achieve financial independence. To access our show notes, transcripts or courses, go to theinvestorspodcast.com. This show is for entertainment purposes only. Before making any decision, consult a professional. This show is copyrighted by The Investor’s Podcast Network. Written permission must be granted before syndication or rebroadcasting.


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